Claim Portfolio Valuation
Our analytic approach to settlement bargaining optimization provides unique insight into claim portfolio valuation and related asset/liability management issues as they pertain to litigation.
Corporate and institution litigants frequently value outstanding legal claims based on the submitted value of the claim or conservative estimates of the trial outcome. While this is important information for financial statement disclosure, it can grossly distort the overall value of claim portfolios if only because the vast majority of legal disputes settle before a court adjudication.
Claim Portfolio Valuation
At SettlementAnalytics™ we use a proprietary, game theoretic economic analysis to value legal disputes in the more complete context of both trial and settlement. The result is a quantitatively defensible and much more realistic measure of a litigation’s true economic worth.
Our rigorous, quantitative and systematic approach draws upon existing in-house expert opinion about trial outcomes to quantitatively infer the probability of settlement and the optimum level at which settlement is most likely to occur. This analysis is based on the canonical models of the game theory of litigation and settlement, which are drawn from over 30-years’ of academic research in the field of legal-economics.
Using this approach and our proprietary software, we are able to compute a more realistic value for legal claims as the probability-weighted combination of both trial and settlement. The application of this method can be applied to all claims, thus allowing corporate litigants to obtain an accurate financial economic picture of their entire legal claim portfolios.
To learn more about the proprietary game theory software used by SettlementAnalytics in its consulting services, visit the OptiSettle page.
Litigation Risk Analysis
While game theoretic models of legal dispute provide a valuable perspective on claim value and settlement probability, they also contain hidden insight into the financial dispersion of the potential outcomes associated with any particular claim. This measure of financial dispersion, when appropriately ‘mined’, provides a unique and realistic picture of the economic risk implied in litigation. At SettlementAnalytics we extract this valuable information from our game theoretic models using Monte Carlo simulation, and in so doing, we obtain not only a picture of the financial risk of individual claims, but by repeating the process we can compute the risk profile of an entire litigation book. To learn more about dispute risk simulation, see Litigation Risk Measurement.
We have recently outlined our approach to portfolio risk measurement in an article for Intellectual Asset Management magazine: Value in the Shadow of Conflict.
Numerous stakeholders within an organization can have a vested interest in a more realistic and quantitative perspective on litigation economic exposure. Legal departments need to know the real measure of their claim portfolio in order to best allocate resources. Treasury and finance need accurate valuation of claims as input to risk management and financial planning. And the executive and the Board need a management accounting perspective of important legal claims for purposes of key settlement decisions and as input to proper corporate governance.
In addition to better valuation metrics, this alternative perspective of legal economic value can provide corporate and institutional litigants with:
- A sensible basis for active claim portfolio management
- Facilitate the development of plaintiff recovery programs
- Provide valuable input to litigation portfolio risk management.